Assignment: Project Guidelines
Overview
The final project forthis course is the creation of a memorandum with appendix (7-10 pages).
As an associate working in aprivately held enterpriseorworking with privately held clients, it is imperativeto be able to advise clients on the tax implications of theirfinancial investments. The ability to model the tax consequences of transactions and do cost benefit analysis is crucial.
For yourfinal project, you will model the role of an associate working in aprivate consulting firm. You will demonstrate yourability to advise clients on whether they should operate as asole proprietor, apartnership, an S corporation, ora C corporation. Additionally, using yourtax research skills and understanding of federal income taxation, you will havethe opportunity to evaluate tax consequences from sales and distributions fortheircompliancewith the Internal Revenue Code and Treasury regulations.
The project is divided into fourmilestones, which will be submitted at various points throughout the course to scaffold learning and ensure quality final submissions. These milestones willbe submitted in Modules Three, Five, Seven, and Eight. The final product will be submitted in Module Nine.
In this assignment, you will demonstrate yourmastery of the following course outcomes:
• Recommend an appropriate business tax entity based on the analysis of atax situation forachieving favorable economicimpact on the client's taxable income
• Utilize appropriatetax forms and schedules that compute taxableincome on individual tax returns and reflect versatility of thought, resulting in the best economicsolution forthe individual taxpayer
• Apply accrual and cash basis accounting best practices and moral reasoning in determining when business transactions may be reported for incometax purposes
• Assess the economicimpact on taxable income forthe business tax entity in relation to Internal Revenue Code and Treasury regulations and the optimum desired outcomes forthe client
• Evaluate the tax consequences that result from sales ordistributions of property fortheircompliance with IRS Circular 230, Internal Revenue Code, and the American Institute for Certified Public Accountants and foradvising the client
Prompt
You are currently working at a mid-sized certified publicaccounting firm. Yourclient is Bob Jones. Bob, age 60 and single, has recently retired from IBM. He has $690,000 available in his 401(k) fund and he is thinking of using that money to open a used car business that will be located at 210 Ocean View Drive in Pensacola, Florida. Bob has estimated that the business might make $300,000 in taxable income.
Bob's personal wealth including investments in land, stocks, and bonds is about $14,000,000. He reported an interest incomeof $20,000 and dividend income of $6,000 last year. The $14,000,000 includes land worth $9,000,000 that Bob bought in 1966 for$450,000.
Bob has hired yourfirm forprofessional advice regarding whetherhe should operate as asole proprietor, apartnership, an S corporation, ora C corporation. He is also considering transferring apossible 40% interest in his new business to his daughter Mandy, age 23 and single.
Prepare amemorandum to the client, recommending atype of business entity,including an appendix of supporting IRS tax schedules and forms. Specifically, the following critical elements must be addressed:
I. Memorandum
A. Recommend atype of business entity for the client to considerbased on your tax research. Consider justifying yourrecommendation using the code and regulations that relate to the business entity.
B. Differentiate between accrual accounting and cash basis. Based on the type of business and the client's accounting system, what is the impact when revenue is recognized?
C. Based on the decision of accrual vs. cash basis, describe when revenue would be recognized on the sale of inventory, and how the accrual reporting differs from cash basis.
D. Determine the economicimpact on the client's financial situation. Based on your decision, determine the potentialtax liability, keeping in mind appropriate Internal Revenue Code and Treasury regulations.
E. Identify the tax consequences on the sale or exchange of the land consistent with capital gain rules. Considerthe selling expense, broker's fees, closing costs, appraisals, and surveys and the correct schedule form to complete.
F. Justify whetherornot the client should choose abusiness entity that has limited liability protection. Be sure to include possible future liability issues based on the potential economicimpact and appropriate Internal Revenue Code and Treasury regulations.
G. Describe the tax effect on the recommended business entity and the impact it will have on the client's personal tax return. Consideraddressing how the business entity affects the completion of the 1040 tax form.
II. Conclusion
A. Evaluate the economicimpact on the client's personal returns based on the recommended entity. Justify why the client would not choose the otherbusiness entities by informing the client of the differences.
B. Justify yourrecommendation regarding the client's daughterhaving an ownership interest. Provide details supporting the recommendation taking into consideration the jargon and mechanics of the transaction.
C. Summarize, using moral reasoning, cash or accrual basis accounting systems in relation to the selected business entity. Consider how the accounting system impacts revenue recognition, consistent with Internal Revenue Code and Treasury regulations.
D. Describe the after tax effects on the client's cash flow based on the sale of the land that is needed to provide the funds necessary to start the business. Consider including capital gains tax rules.
E. Explain whetherornot the client and his child should take a salary or cash distribution according to tax purposes and Internal Revenue Code and Treasury regulations. Consider the type of business and the tax effect whetherit is salary, dividends,orcash withdrawal.
III. Appendix
Based on yourrecommendation to the client regarding proprietorship, taxableincome, and sale of land, complete the appropriate tax schedules and forms described below.
A. Prepare the appropriate page of Form 1040 and include the sale of the client's land on the appropriate tax scheduleand form forthe recommended business entity. Be certain to complete each tax schedule and form accurately and completely.
B. Prepare the appropriate schedule and tax forms to reflect taxable income based on yourcalculations and the disposition of asset. Be certain to complete each tax schedule and form accurately and completely.
C. Illustrate how creative problem solving and versatility of thought impact professional advice that you intended to result in the best economic solutions forthe client. Consider providing real-world examples to support yourclaims.
Milestones
Milestone One: Gross Incomeand Capital Gains
In Module Three, you will submit adraft of the gross income and capital gains, analyzing the following critical elements: I. Memorandum,section E, and II. Conclusion, sections Dand E. You must compute the property disposition capitalgain and taxation of gross income. In completing this assignment, considerthe tax effect of salary dividends orcash withdrawal in accordance with Internal Revenue Code and Treasury regulations. This assignment will be submitted as a Word document.
Milestone Two: Revenue Recognition and Accounting Methods
In Module Five, you will submit adraft of the revenue recognition and accounting methods, summarizing the following critical elements: I. Memorandum, sections B, C, and D, and II. Conclusion, section C. You will determine revenue recognition and the economicimpact of the client's financial situation. Based on your decision, determinethe potential tax liability, keeping in mind appropriate Internal Revenue Code and Treasury regulations. This assignment will be submitted as a Word document.
Milestone Three: Choiceof Business Entity
In Module Seven, you will submit adraft of the choice of business entity, analyzing the following critical elements: I. Memorandum, sections A, F, and G, and II. Conclusion, sections A and B. The short paperwill communicatetax aspects of business entities to the client. This assignment willbe submitted as a Word document.
Milestone Four: Tax Forms
In Module Eight, you will submit IRS draft tax forms, analyzing all of the critical elements in III. Appendix, sections A, B, and C. Based on yourresearch, the tax forms and schedules willsupport yourrecommendation to the client. This assignment willbe submitted as completed tax forms, which are provided to you in yourtextbook resource CD oron the IRS website.